Wednesday, December 11, 2013

Participation Rate Drop Mostly Economic, Not Demographic

The U.S. unemployment rate has dropped from a high above 10% to 7%. However, many of us has pointed out that this has been coupled with a continued drop in the labor force participation rate and argued that the drop therefore likely reflects that many job seekers have been discouraged from being rejected so many times by employers that they see no point in continuing to seek jobs actively. Remember, to be counted as unemployed it is necessary but not sufficient to lack employment. You must lack employment and actively apply for jobs.

An alternative explanation to the drop in the participation is that the population is aging as more and more so-called "baby boomers" retire. The standard participation and employment rate figures relates the number of employed and the workforce to all people older than 15. If the population is ageing, then the drop in the  participation rate will reflect that more people reach the age when they want to retire, not a weak labor market.

Recently, a number of news stories have asserted that the drop "entirely" reflects this demographic factor.
However, as it turns out, that is just about the drop in the most recent year. If we instead focus on the drop since the beginning of the recession in 2007, it is clear that most of the drop reflects labor market weakness.

One way to test this theory would be to focus on so-called prime age workers, people 25-54 which usually haven't retired. The employment rate in that age group has only increased from about 75% to 76% and is still well below the 80% level reached in 2007. This also implies that most of the drop in the official unemployment rate reflects an increase in the number of discouraged job seekers.


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